Opinion: 5 future scenarios that will change how you think about money

The ‘Great Transformation’ will reorder your savings and investing priorities

By

ChristopherWolfe

Daniel Hertzberg

The “New Normal” is over. The term, popularized during the 2008 financial crisis to describe a future of sluggish growth and high joblessness, is a future that never happened.

Instead, we’re looking a period of dynamic change — call it the Great Transformation. Changes range from innovations that disrupt how we live, to depleting natural resources, to new rules of investing.

Here are five themes that can help investors stay on top of this change, and make the most of the opportunities it offers:

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Energy shortages have driven drilling advances such as fracking, opening up supplies of crude oil and natural gas, allowing the U.S. to outproduce Saudi Arabia and Russia. Opportunities include master limited partnerships that build and operate pipelines and other parts of the energy infrastructure, and companies that make equipment and provide services for exploration, extraction, production and transportation. At the same time, investors have to beware of the limits of technology: Drought has so lowered the water table in some areas that fracking may no longer be profitable in parts of the U.S.

In fact, with climate volatility increasing and the demand for water expected to grow by 40% in the next two decades, shortages of water may become as common as shortages of oil and gas have been. The opportunities here include companies that develop, install and operate desalination plants and technologies that purify rainwater, as well as those that create drought-resistant seeds or optimize crop yields through seed selection, seed spacing and planting dates.

2. Markets: Be selective in the shift to stocks from bonds. Since the financial crisis, more than $1 trillion has flooded into bonds — a trend that has been slow to reverse even with the stock market’s terrific performance. Yet a “great rotation” into stocks is happening, even if incrementally.

So far, much of the money going into stocks has come from cash rather than bonds. But once demand for bonds slackens, equity markets could be in for an extended bull market. The best bets may be among companies that take advantage of resurgent consumer and corporate spending — especially what we call “TEAM USA,” companies in the domestic technology, energy, automobile and manufacturing sectors.

Accordingly, picking individual stocks or actively managed funds may be preferable to passive index tracking. It’s also important to think globally, because domestic share prices inevitably will catch up with corporate profits.

3. Innovation:Technology changes everything, and keeps changing it. Some companies may be too big to succeed. Increasingly, innovation is the key to success, in some cases enabling nimble start-ups to outpace corporate behemoths.

Looking ahead, the greatest opportunities will emerge where the gaps between supply and demand are widest. For example, there will be a huge shortfall of doctors in the next 20 years as those who began practicing in the 1970s and 1980s retire — even as their fellow Baby Boomers require more medical care. That gap will be filled, at least partly, by innovation — everything from remote sensing devices to personalized medicine.

Other examples include industries that need to cut costs or improve efficiency to increase their competitiveness or those responding to emerging consumer demands — from companies developing robotics for manufacturing and energy technology to cybersecurity and mobile web products and services.

4. People: The world will see people living longer lives, greater possibilities for women, and more wealth in emerging markets. Longer lives will mean more spending — on health care, travel, leisure, entertainment and financial advice. People will need to invest for growth to give them income for a longer lifespan, and that primarily means stocks. Dividend-paying, income-generating stocks should benefit from this trend. Already, one in four S&P 500
SPX, +0.31%
companies offers a dividend yield higher than that of 10-year Treasurys
US:10_YEAR
.

Developing countries especially are undergoing major changes, as. incomes rise, education improves, women increasingly enter the workforce, and a middle-class evolves. Expect greater demand for durable goods, entertainment, technology build-out, and more and better health care. Investors should think globally, especially about established international brands in areas that appeal to the newly affluent, including apparel, personal care, automobiles and luxury.

5. Government: Reforms worldwide are opening up economies. Reform attracts capital, as investors seek to get in early on resurgent economies. European economies that were on the edge of default not long ago have had the best-performing equity markets over the past year. China, faced with slowing growth, has been rooting out corruption and loosening government controls; its markets could be the next beneficiary of reform.

There will be many opportunities. Corporate bonds are doing well in the low-interest rate economics of Northern Europe, while sovereign bonds have strong yields in countries hit hard by the debt crisis, including Portugal, Ireland, Italy, Greece and Spain. China could benefit from government involvement in infrastructure projects, ensuring their likely completion, to the benefit of suppliers and importers. Yet external developments, such as slower growth in China and the Ukrainian crisis, could pose threats, requiring selectivity and an understanding of the dynamics in these countries before you invest.

So, what’s the bottom line for investors in this transforming world? Investors need to expect continuing change, increased volatility and greater uncertainty as more moving parts interact in the global economy — often in surprising ways.

Moreover, the rising equity markets of the past several years have resulted from the extraordinary level of government fiscal and monetary stimulus that began with the financial crisis and the Great Recession. By definition, what is extraordinary cannot continue forever, and investors need to prepare themselves, and their portfolios, for the eventual reduction or end of this stimulus.

With these continuing changes in the global economy and markets and an eventual decrease of stimulus, diversification alone is not enough. Investors should consider implementing big, global themes in their portfolios. Investing in themes, rather than any single investment strategy, is the best response to uncommon times.

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